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Newcrete Products D/B/A v. the City of Wilkes-Barre

February 2, 2012


The opinion of the court was delivered by: Judge Simpson

Argued: December 13, 2011




In this appeal, we are asked whether the doctrines of piercing the corporate veil and equitable subordination are available avenues of relief where a municipality allegedly influences its redevelopment authority to perpetrate inequity against a vendor. Specifically, Newcrete Products (Newcrete) appeals an order of the Luzerne County Court of Common Pleas (trial court) that sustained the City of Wilkes-Barre's (City) preliminary objections in the nature of a demurrer. Newcrete contends the equitable doctrines, which typically apply to private business corporations, are applicable to the relationship created pursuant to the Urban Redevelopment Law (Law)*fn2 between a city and its redevelopment authority. Upon review, we affirm.

I. Background

In 2001, City desired to start a building project (Project) in its downtown area. The Project consisted of a theater and parking garage. During all relevant times the City of Wilkes-Barre Redevelopment Authority (Authority) existed for the redevelopment of City consistent with the Law. Therefore, City pursued the Project with Authority's cooperation.

From the outset of the Project, Authority was financially distressed. As a result, City signed a guarantee and surety agreement on Authority's outstanding line of credit of approximately $1,500,000.00, and transferred additional funds of $150,000.00 to Authority. In part the purpose of the payment and surety agreement was to allow for Authority to purchase the property necessary for the Project. In addition to City's contributions, the Pennsylvania Office of the Budget (Commonwealth) also committed funds. However, the Commonwealth's financial commitment was subject to its approval of City's Redevelopment Assistance Capital Program application (Application).

Thereafter, in October 2001, Authority awarded Newcrete the contract (Contract) for the supply of the pre-cast concrete required for the Project's parking garage. However, three months into the Contract, Authority issued Newcrete a stop work order. Authority issued the order in response to the trial court granting a neighboring property owner an injunction prohibiting any further construction. Specifically, the trial court issued the injunction because of an ongoing boundary dispute. Nonetheless, at that time, Authority and City advised Newcrete that the dispute would quickly settle and that work would promptly restart.

During the work stoppage, City continued its efforts to procure funding for the Project. Additionally, City continued to provide funds to Authority to pay its various debts. However, in August 2002, the Commonwealth rejected City's Application, and thereby denied funding. Specifically, the Commonwealth cited the following as reasons for denial: City's tenuous financial situation; the Project's uncertain legal status caused by the injunction; and, its ongoing investigation into City's administration of several other building projects. Authority never lifted the stop work order, and the Project permanently halted. Consequently, Newcrete submitted invoices for its work to Authority, which Authority did not pay.

In November 2002, as a result of Authority's nonpayment, Newcrete filed a demand for arbitration. After settlement negotiations finally broke down in February 2006, an arbitrator awarded Newcrete $4,278,614.04 in damages. Subsequently, the trial court confirmed the award and granted Newcrete interest and court costs.

Notably, three months prior to the trial court's confirmation of the arbitrator's award, City entered a judgment by confession against Authority in the amount of $4,370,112.00. The judgment by confession was entered pursuant to a promissory note made as security for City's past and future payments to Authority.

Believing Authority may be judgment-proof, Newcrete filed this declaratory judgment action against City.*fn3 By this action Newcrete sought to hold City liable for Authority's debts under the equitable theory of piercing the corporate veil. Alternatively, Newcrete argued that City's judgment against Authority should be subordinated to its arbitration judgment through the court's equitable authority.

In response, City filed preliminary objections in the nature of a demurrer. City argued: 1) Newcrete failed to join an indispensable party, Authority, as a defendant; 2) the doctrine of piercing the corporate veil did not apply because City and Authority are separate entities under Section 4 of the Law; and, 3) Pennsylvania does not recognize the doctrine of equitable subordination in this context.

The trial court determined that based on Section 4 of the Law, City and Authority are defined as separate entities and neither could be considered an instrumentality of the other. Therefore, the trial court held that Newcrete could not seek relief based on piercing the corporate veil because the remedy was foreclosed by the legislature. Additionally, the trial court concluded the doctrine of equitable subordination was inapplicable. In reaching its determination on whether Newcrete stated a legally cognizable claim, the trial court did not address whether Newcrete failed to join an indispensable party.*fn4 Newcrete appeals to this Court.*fn5

II. Issues

Newcrete contends it raised cognizable claims in its complaint, and therefore, the trial court erred in sustaining City's preliminary objections. Specifically, Newcrete asserts City may be liable for Authority's debts to Newcrete through the doctrine of piercing the corporate veil, because City operated Authority with near absolute control as its alter ego. Furthermore, Newcrete argues City improperly used Authority to carry out the Project while shielding itself from risk and liability with the knowledge that Authority was undercapitalized and existed solely as a result of City's funding. Therefore, ...

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